Sunday, March 28, 2010

US healthcare

So now that the US healthcare debate has resulted in a bill being passed, and hopefully the rhetoric subsides, I wanted to take a broad look at what this bill is really all about.  What I will contend is that this bill extends healthcare to nearly all Americans, and it levels the playing field between those with and those without insurance in terms of costs.

Any Canadian or British (or European) person will tell you that they look on in horror when they see the high prices that Americans are forced to pay for healthcare and are thankful that they don't have to endure those types of expenses.  On the other hand of course, the US has some of the lowest tax rates on income in the world ( - despite what most Americans think) and instituting a single payer tax system would definitely cause those taxes to rise.  But given that healthcare is probably the most important thing in our lives, there are many who think this is the "first best" alternative.  What I think most Americans fail to realize is that in Canada and Britain (and elsewhere), the government doesn't take over healthcare - it basically takes over the insurance roll in the system.  British doctors set up privately in practices, and although their rates are set by the government, they can see patients privately if they wish, and indeed there is a thriving private medical insurance scheme in the UK as an alternative to the National Health System (NHS). 

So what was passed last week?  In my opinion it was a bill that extends private health insurance to nearly every American and therefore lowers the cost of healthcare for us, the population.  It is a "second best" option, but it is better than what we had, and for good reason.  How?  Well as one of my friends recently told me: "I was in hospital for 4 days and the bill came to $28,000.  Once I had handed over the bill to my insurance company, they negotiated it down to under $7,000.  I ended up paying my deductible of $200".  Now for that particular incident , look at the potential costs: if she had been an uninsured patient she would have been on the hook for $28,000; but as she was insured she ended up paying $200 - more than 100 times smaller bill for the hospital stay.  Although noone is refused treatment in a public emergency room, those people who do not qualify for medicare or medicaid can quickly face bankrupcy if they don't have insurance, and sometimes even if they do have health insurance.  Hopefully the bill will fix some of the limitations on insurance and more tightly regulate coverage. 

So what didn't the healthcare bill do?  Several things:

First, for any American who has been to a doctor in Britain or in Europe, what is most surprising is that when you walk into the doctor's office, there is much less of a front office.  There is no triage, and rather shockingly, the doctor usually walks to the waiting area to meet you after calling your name.  So the doctor's offices in Canada and Europe tend to be much more efficient - but why is this so?  It's partially due to the fact that medical lawsuits in the US have frightened doctors into checking for everything.  This bill changed nothing in this arena - and yet there is still a lot of saving to be made by curtailing lawsuits and this would mean much less costs in what is now an obviously bloated system.

Second, it didn't curtail the health insurance industry, and if anything it gave them more business.  Next time around I think we should either get rid of the healthcare insurance companies and have a single payer system or heavily regulate them like we do banks. 

Third, it didn't cover all small businesses.  I really don't understand why small businesses with less than 15 employees are exempt - their employees should be covered in my opinion, and some kind of voluntary pools should have been set up to ensure that every American can get reasonably priced health insurance.  These are the people that will still be left out, so we are not going to stop hearing horror stories about people having trouble paying their healthcare bills and facing bankrupcy, but hopefully we'll hear them much less!

Thursday, March 18, 2010

Dallas Fed The Euro and Dollar in the Crisis and Beyond - March 17, 2010.

I attended a two day euro/dollar event over the last couple of days, with Wednesday's session a general policymaker day on the markets/government policies and the fallout from the financial crisis and the Thursday an academic workshop on European Integration. 

First, on the Wednesday there was a lot of interesting stuff but there were a few points missing from the debate.  See the agenda at

The President of the Federal Reserve Bank of Dallas, Richard Fisher, closed out the day by hitting the nail on the head, in my opinion, with his comments on the recent financial crisis.  He said ( - and here I'm paraphrasing - ) that these events occur with regularity and are just part of human behavior - and we probably will not be able to predict the next adverse event, and have to deal with it when it occurs.

I would go one step further though.  What most people missed at this conference was that this financial crisis was the result of the housing crisis, and has led to a recession, which is just part of the regular business cycle.  In other words although the Great Depression and the current downturn have serious social and political consequences, they are still essentially part of the regular downturns that we have in the macroeconomy known as the business cycle.  The business cycle is just a fact of macroeconomics and until we find a way to stop it occurring with such regularity, we need to just accepted it for what it is - a cycle!!

So why isn't the current downturn different from others as we are constantly being told that this is almost a depression (and has already been called "the great recession" by economic pundits)?  Because it resulted from a bubble in a market ( - the housing market), just like the Great Depression also resulted from a bubble in a market ( - the stockmarket).  What happened in both the Great Depression and the current recession is that both downturns spread to the financial sector, exposing a fault line or two, and causing a financial crisis which then spread to the rest of the economy.  The big difference though is that in the current recession the Fed and the Federal government have done the right thing - they have learned from the mistakes they made at the beginning of the Great Depression and have averted a major disaster.  The thing about most bubbles is that they i) usually don't spread to other sectors in the way they did this time through the financial sector and ii) they usually are not as deep as the current one as they exposed some major weaknesses in the financial services sector.

So shouldn't economists seek to stop what happened recently from happening again?  Most non-economics educated people would say "of course"!  I mean why would a doctor want a cold to reoccur again if they could stop if from happening?  But that's what recessions are - they are basically a mutating virus that hits the economy in different ways each time and can be particularly nasty if the body is physically run down.  But the economy isn't quite like a body - the recession also "cleans out" what economists call "malinvestment" - the bad investments that were done in the previous boom, so that the economy can begin to grow again in a healthier fashion.  Economists who think like this, by the way, are usually labelled "Austrians" after the group of economists who originated in Austria before the second world war. 

So when Adam Posen says "we all made mistakes with the financial services sector", I am not sure I agree.  Noone was going to change the regulatory structure in the US financial services sector without a crisis, so actually this gives the politicians a reason to act.  But the mistakes that were made were made by politicians years ago when they set up the patchwork regulatory framework that allowed "regulatory arbitrage" with also hardly any regulation for financial derivatives.

The big mistake we made, I believe, is not paying enough attention to what happened in Japan in the early 1990s.  Japan is still suffering from the mistakes that were made back then, and luckily we haven't fallen into the same traps as they did...but still it is not a pleasant experience for those people who have lost their jobs, and we are far from being out of the tunnel yet!!

Sunday, March 14, 2010

Economics and the stockmarket

OK, so much for posting every 1-3 days.  I just have too much going on right now - and my career unfortunately (or maybe fortunately) doesn't depend on this. 

So some random thoughts today from my own thinking about the current state of the global economy and the financial markets. 

First, unlike most of the previous economic downturns, the US caused this downturn, so coming out of the current recession will require the banking sector regulatory framework to be fixed so as to instill some confidence in both domestic and foreign firms and investors that nothing like this will happen again.  Also the US housing market is still not good and there is a threat of a collapse in the commercial real estate market which makes things risky in terms of a new wave of corporate bankrupcies.  In this sense the US is likely to come out of the recession late compared to other countries.  Put in economic language, the US usually drives the international business cycle, but this time it will lag the international business cycle.

Second, the state of the euro area is in flux right now.  There is no certainty about a European Monetary Fund (EMF) coming into existence, which would calm the markets and also instill some confidence in the future of the euro area.  There is also considerable doubt about how sustainable the Greek fiscal austerity measures will be from a political perspective, so this still creates some risk of contagion to other euro area member states.

Third, the Chinese economy has done remarkably well over the past few years, but the housing market there is precarious, and the bubble could burst quite easily, creating asset deflation and causing some banks and loan providers to be in serious trouble. 

So what does this all mean for where to put your money?  If you're keeping it in the US right now I'd put it into technology stocks as this is where the US clearly has a comparative advantage and will benefit from the pick up in economic activity that will clearly come first in the rest of the world.  Other than that I'd pick a Canada fund if you really want to be in North America as the Canadian dollar tracks the US dollar, and also the Canadian economy really doesn't have the (fiscal and real estate) downsides of the US economy.

I would take a sizeable amount of what you have and put it abroad - the emerging economy funds, Eastern European, Japanese and Gold funds are all good and will likely give you a better return over the next few years than you'd get from a US stock fund.  Nordic funds are also probably a good bet as apart from Finland none of them are members of the euro area, and also African funds will likely do well (if you can find any!) as the Chinese are continuing to buy up land and develop resources there.

Anyway, please let me have any comments you might have...I am actually thinking of starting a website solely devoted to offering this type of service!!

Friday, March 5, 2010

The U6 unemployment rate and the US labor market

So the unemployment figures for February stayed constant ( - see, confounding those economists who had expected the rate to rise because of the winter storms up the east coast.  So that's the good news - despite the bad weather unemployment rates haven't risen.

But there was some bad news - 36,000 jobs were still lost across the nation last month and the unemployment rate hides the fact that there are now a lot of "discouraged workers" out there - people who have dropped out of the labor force because they aren't looking for a job anymore - yes, they're the people who have given up hope.  And it's hardly surprising they've given up hope when you look at the duration statistics - 6.1 million of the unemployed have now been out of work for more than 6 months. 

The Bureau of Labor statistics defines these discouraged workers as "marginally attached" - and actually produces statistics for these workers - they are estimates of course - but they really don't look good right now - an indication of how bad things are out there in the US labor market.  The trends in the "marginally attached" workers were described as follows:

"Among the marginally attached, there were 1.2 million discouraged workers in February, up by 473,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.3 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities."

So what is missing from the mainstream media reports is that if you roll these workers into the statistics, it really doesn't look quite so pretty.  I decided to take the data and plot it myself from the stats that the BLS issues itself, and this is what it looks is the unemployed plus discouraged workers plus marginally attached plus part-time workers for economic reasons (the underemployed) as a percentage of the civilian labor force plus marginally attached.

This is the U6 rate, and it's movement mirrors the unemployment rate for the most part, rising rapidly throughout 2009, but interestingly the drop going into 2010 seems to have ticked up again in February with the rate moving from 16.5% to 16.8% with most of this upward move due to discouraged workers jumping from 1.06 million to 1.2 million, and the number who are underemployed jumping from 8.3 to nearly 8.8 million.

What bodes well is that at least some of these underemployed workers still have jobs, otherwise the unemployment rate could be a lot worse: but on the other hand some of them could have been in full time jobs that were converted into part-time jobs which wouldn't be good. But what is definitely not good is the increase in discouraged workers - these workers have given up looking for the moment - and if the labor market begins to improve these workers could come back into the market very quickly making the recovery in the jobs market look slower. 

Wednesday, March 3, 2010

Soros on the euro - but what about the other flaws??

On Fareed Zakaria's CNN show this week we had the privilege to hear the views of the billionaire financier George Soros (see on a variety of issues.  What caught my ear though was his comment that the euro was "fundamentally flawed" as the European Union doesn't have a Treasury to enble fiscal transfers to occur, so as to offset the asymmetric shocks ( - unexpected events that occur which affect one member state much more than the others).  This is of course just one of the basic problems with the euro's architecture, and Soros is right in pointing out that this is probably the most obvious flaw to think about in the light of the Greek debacle.

But what really got my attention was that Soros then went on to say that "either Europe takes the steps to make up for it's institutional deficiency or it may not survive" ( - I assume he means the euro here).  So I want to add a little to what Soros said, by i) talking about other things that might be wrong with the euro and ii) by thinking a little about what form these institutional measures might take. i) I'll do today and I'll leave ii) to tomorrow.

So let's start with the other flaws. 

First, the "Maastricht criteria".  These were the hurdles which member states had to negotiate to become a member of the euro club.  The rewards for negotiating these hurdles were significant, as it meant lower interest rates, added credibility internationally, and to be blunt, a seat at the heart of the European integration project. It's like the local neighborhood clubhouse - who wouldn't want to become a member unless they didn't like their neighbors too much (for example the UK).  So if you have to fulfill certain criteria (like having a certain minimum salary - to continue our clubhouse analogy) you would maybe manipulate things a little to get in.  The Commission was aware of this, particularly when certain member states asked if they could sell gold to lower their budget deficits, and so the Commission made up quite strict rules about how to measure budget deficits, which all the "northern" (read less corrupt and less politically manipulated) member states duly abided by.  Southern (read generally more corrupt and more politically manipulated) member states of course stayed relatively silent on this, and now we see why.  Countries like Italy got in because of statistical anomalies and Greece actually didn't get in first time around, so realized what it needed to do the second time around.  The main point here is that the Maastricht criteria were flawed to begin with - the statistics which were used to base the entry decision on were produced by each individual member state - so they depended on the quality and honesty of the statisticians and politicians involved in the production of the stats.  The result is that if you have flawed entry criteria you're going to get problems at some point along the way as members don't live up to expectations.

Second, "surveillance".  The European Commission made a big song and dance about member state surveillance back in 2004 when the Stability and Growth pact (or SGP - see was revised to soften the actual criteria (because Germany and France had run up against the deficit limits that were supposed to trigger sanctions).  Clearly they haven't worked, and not because it wasn't a good idea, but because the Commission can only monitor what is produced by the member states.  Once again its the member states that produce the statistics, or manipulates the statistics for political purposes, so this wouldn't be detected by the "surveillance" process. 

Third, and probably most importantly, the ECB's treatment of public debt in monetary transactions.  There is no mechanism whereby the ECB can basically "grade" the member states on their fiscal policy. Now of course this doesn't happen in the US, and in the case of Canada there are provisions for it to happen (a line item in the Bank of Canada's balance sheet) but it has never happened.  The reason is that both Canada and the US (and I presume other monetary unions) have federal debt issuing capabilities.  So when the Federal Reserve does open market operations it uses US federal bonds and notes, but in the case of the ECB, it has to use member state bonds because there is no EU federal debt.  So the rules are that the ECB cannot discriminate between different member state bonds.  So this means that the member states do not feel the fury of the markets because there is always a buyer (and therefore a "backstop") for Greek bonds in the form of the ECB.  And from the individual investor perspective this clearly poses an adverse selection problem.  If I'm holding German, French and Greek bonds and the ECB is looking to buy euro-denominated bonds for its monetary policy transactions, which am I going to sell?  It's a no-brainer!! 

OK, so given that the euro design is flawed, what should happen now?  More on this next time in part II!!

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